Risky Business

WAR ON WALLETS Trade credit insurance helps protect against such unforeseeable circumstances as civil unrest—such as Thailand’s demonstrations against government corruption in November 2013, pictured above—which can be a major trade disruptor.

6 QUESTIONS AND TIPS FOR GETTING TRADE CREDIT INSURANCE

War, revolution, economic upheaval, currency fluctuations. There are plenty of ugly scenarios that can keep overseas clients from paying invoices.

Fortunately, there’s a relatively inexpensive way that exporters can avoid insomnia: trade credit insurance. This type of insurance protects you in case an overseas buyer can’t pay an invoice, usually covering 90 percent to 100 percent of what is owed, according to the Export-Import (EXIM) Bank of the United States. It can be purchased through an independent broker or from EXIM Bank. While you can also get protection by requiring a letter of credit, these are expensive for buyers.

Trade credit insurance can also help you grow your business, opening up new financing options with banks and other asset-based lenders. “Trade credit insurance allows borrowing on what may otherwise be receivables that wouldn’t qualify to borrow against,” says Jim Quirk, practice leader for trade credit and political risk at Wells Fargo Insurance Services. “With one of your largest single assets being your accounts receivable,” he says, “it provides a potentially better credit profile.”

With this financing, you may be able to go after opportunities otherwise closed to your business. “This is one of the few types of insurance coverage that makes money or can expand sales for a company,” Quirk says.

Trade credit insurance can also be helpful for businesses that are using their own sales to fuel growth. “Even if you’re self-financing, if you’re moving rapidly or growing fast, you can get beyond yourself in terms of your own ability to absorb risk,” says Dorothy Erlanger, a Richmond, Va.-area business consultant who has advised many firms around the world in areas such as marketing, who also teaches in the International Business Certificate Program at Virginia Commonwealth University.

The key to getting the most out of trade credit insurance is shopping wisely. Buy the wrong policy and you may not have all of the protection you need to avoid a loss. Here are some questions to guide you in choosing the right policy.

DO YOU NEED TRADE CREDIT INSURANCE AT ALL?
If an unpaid bill by an overseas client is big enough to bring your company down or make a serious dent in your universe, as the expression goes, chances are you need trade credit insurance.

Similarly, if you are entering a country where you don’t understand the legal climate and want to protect against snafus you can’t begin to anticipate, trade credit insurance may give you peace of mind.

“Our perspective is you can always credit-insure, as long as you have trade receivables,” says Jochen Duemler, CEO and head of Euler Hermes Americas, which partners with HSBC Bank to provide trade credit insurance to the institution’s commercial banking customers in the U.S. “We have no formal technical restrictions in terms of industries or where you are in terms of industries. We are in all industries, more or less.”

One small-business client of Euler Hermes Americas is a 10- to 15-person, Miami-based exporter of electronic-technology parts to South America. “Our trade credit insurance allowed them to give more competitive credit terms in the markets they developed for themselves,” Duemler says. “It allowed them to say, ‘I will give you 60-day payment terms instead of asking for a letter of credit, because I am credit insured.’”

Erlanger says that in her business, she has seen trade credit insurance used mainly by sellers of big-ticket products, rather than services. “Typically, I see it much more for higher-value items, things like medical devices,” says Erlanger.

Sometimes, companies will buy trade credit insurance when they want to work with a client that is stable but is likely to pay slowly.

“You might be selling to a hospital system in the country and payment might be delayed or prolonged, but it is such an attractive situation you want to go ahead,” she says.

HOW MANY BUYERS DO YOU NEED TO INSURE?
Most trade credit insurance policies that cover you for multiple buyers will cost you 1 percent or less of insured sales, according to EXIM Bank.

Prices will vary considerably, though, if you only want to cover a single buyer. For instance, if you have one client who owes you $1 million and only want trade credit insurance for this account, you may have to pay higher rates than you would for a multi-buyer policy that also covers clients who owe you much smaller amounts.

“By definition, a single-debtor policy is cherry picking,” says Gary Mendell, president of Meridian Finance Group, a firm that sells trade credit insurance out of Santa Monica, Calif. “Underwriters will want to get their hands around ‘Why you are covering this one? What do you do that we don’t know?’ The cost of single-buyer coverage tends to be higher as a result.”

But, he adds, “The most important thing is not the pricing; it’s pretty low. The most significant decision factor is: Can you get your customer underwritten?” Once you select a policy, the insurer will decide what level of credit you can extend to that buyer.

If you are new to exporting, it may be worth considering EXIM Bank’s Small Business Multi-Buyer Insurance, designed for firms that are dipping a toe into international waters. Instead of paying premiums up front, you are allowed to wait until you ship. The program is limited to businesses with three years of operating history that sell up to $7.5 million in exports on credit annually.

WHAT SCENARIOS SHOULD I PROTECT AGAINST?
Typically, you’ll need coverage for both commercial and political risk, says Quirk. A commercial risk might be insolvency by a client. A political risk might be one involving currency conversion. “You want to make sure the policy is addressing both of those,” says Quirk.

Find out how an insurance company will protect you if a worst-case scenario takes place—and make sure you are comfortable with it.

For instance, when U.S.-based clients for Euler Hermes needed to collect unpaid receivables after clients in Brazil faced a devalued currency several years back and could not pay them on time, the insurance company helped work out installment plans with the customers. “They work themselves out of the debt in three to four years’ time,” explains Duemler. Each insurer has its own approach.

DO YOU FULLY UNDERSTAND THE RISKS YOU FACE?
If you are doing business mostly from afar, it will be hard to get a clear grip on the risks you face. Businesses that don’t have an office or a plant overseas will need to rely more on their insurance company’s guidance.

“You might want to make sure the underwriter you are considering has extensive or actual on-the-ground resources in the key countries you may be trading in—or, for some of the smaller countries, a significant underwriting presence in the area,” says Quirk. For instance, if you are trading in China, you would ideally want to know that the insurance company has an office in Mainland China.

Even if you visit a distant market on occasion to meet with potential clients, you may not be able to pick up on credit risks from a brief get-together—especially if you get together in a hotel lobby and not at their headquarters. “The people that are easiest to get a meeting with are not necessarily the clients you want to do business with,” says Quirk.

HAVE YOU FOUND THE RIGHT INSURER?
“What you need is a partner who really listens to you, understands your business and brings in industry experts who are specialized,” says Duemler. For instance, if you sell chemicals, your insurer will ideally connect you to its in-house specialist on the chemical industry.

Your insurance partner will be a daily presence in your business life—so consider that when choosing one. For instance, if you find a new buyer, you may need the insurance company to assess the credit risk. If things are going well with an export client, you may need to ask the insurance company to raise its credit limit.

READ THE FINE PRINT
Buying the wrong policy can leave you with a false sense of security. Make sure you choose a plan that does not include clauses where the insurance can be cancelled or reduced suddenly, advises Erlanger. “Have it reviewed by a banker or lawyer who can read it very carefully,” she says. You’ll sleep a lot better at night knowing you can collect on a claim if disaster strikes.